Getting Globalization Right: The East Asian Tigers

Today in collaboration with Americas Quarterly, we’re publishing the second of a series of three articles on globalisation and the fight against poverty by Dani Rodrik, Professor of International Political Economy at the John F. Kennedy School of Government, Harvard University. You can read a print version in AQ’s Spring 2012 edition on social inclusion (online version here) and the first article in the series here

The experience of Asian tigers after the Second World War (South Korea, Taiwan, Hong Kong, Singapore, Malaysia, Thailand, and Indonesia) reinforced the lesson from Japan’s economic history that economic growth was achievable even if a country started at the wrong end of the international division of labor, if you combined the efforts of a determined government with the energies of a vibrant private sector.

All of these countries benefited enormously from exports, and hence from globalization. But none, with the exception of British colony Hong Kong, came even close to being free-market economies. The state played an important guiding and coordinating role in all of them.

Consider two of the most successful countries of the region: South Korea and Taiwan.

In the late 1950s, neither of these economies was much richer than the countries of Sub-Saharan Africa. South Korea was mired in political instability and had virtually no industry, having lost whatever it had to the more developed North Korea. Taiwan, too, was a predominantly agricultural economy, with sugar and rice as its main exports. The transformation that the two economies began to experience in the early 1960s placed them on a path that would turn them into major industrial powers.

In many ways, their strategies mirrored Japan’s. They required, first, a government that was single-mindedly focused on economic growth. Prior land reform in both countries had established some space for governments to act independently from landed elites.

Both countries also possessed an overarching geo-political motive. South Korea needed to grow so it could counter any possible threats from North Korea. Taiwan, having given up on the idea of reconquest of mainland China, wanted to forestall any possible challenge from the Communists. The governments in South Korea and Taiwan understood that achieving their political and military goals required rapid economic growth. Developing industrial capabilities and a strong manufactured exports base became their predominant objective.

This objective was accomplished by unleashing the energies of private business.

Even though both governments invested heavily in public enterprises during the 1960s, the investment was designed to facilitate private enterprise by providing cheap intermediate inputs, for example, and not to supplant it. One plank of the strategy called for removing the obstacles to private investment that stifled other low-income countries: excessive taxation, red tape and bureaucratic corruption, inadequate infrastructure, and high inflation. These were improvements in what today would be called the “investment climate.”

Equally important were interventionist policies, government incentives designed to stimulate investments in modern manufactures. Both governments designated such industries as “priority sectors” and provided businesses with generous subsidies. In South Korea, these largely took the form of subsidized loans administered through the banking sector. In Taiwan, they came in the form of tax incentives for investments in designated sectors.

In both countries, bureaucrats often played the role of midwife to new industries: they coordinated private firms’ investments, supplied the inputs, twisted arms when needed, and provided sweeteners when necessary. Even though they removed some of the most egregious import restrictions, neither country exposed its nascent industries to much import competition until well into the 1980s.

While they enjoyed protection from international competition, these infant industries were goaded to export almost from day one. This was achieved by a combination of explicit export subsidies and intense pressure from bureaucrats to ensure that export targets were met. In effect, private businesses were offered a quid pro quo: they would be the beneficiaries of state largesse, but only as long as they exported, and did so in increasing amounts.

If gaining a beachhead in international markets required loss-making prices early on, these could be recouped by the subsidies and profits on the home market. But importantly, these policies gave private firms a strong incentive to improve their productivity so they could hold their own against established competitors abroad.

In the third and last article in this series, I’ll look at a third example of an “unorthodox” development strategy, China’s shift from a predominantly rural, centrally-planned economy to the industrial giant we know today.